I have XP and this problem exists on only one user. The others are normal. The wallpaper is the standard blue and when I select any other wallpaper, nothing happens. Text and icon size and other prefs have been altered and also cannot be changed. Also I am unable to download anything as that user and everything drags. I have run Norton Anti-virus and Win-doctor, Adaware, and Spybot, but only on other user log-ins because under the affected log-in, these programs just freeze up if I try to run them. It seems really odd to me that the problems are so isolated to the one user. The only changes that I can think of that happened before the problem were some worthless Windows updates, but they were performed under a different log-in so that seems unlikely to be the culprit but considering all of the Windows update problems I've heard about, nothing would suprise me.
Here are my specs:
Windpws XP sp2
NVIDIA GeForce FX5700 LE
Athelon 2800XP
1.5 gig mem

All right its simple your problems seems to be after the update so just perform a system restore to an earlier point where it was working fine..

System restore was turned off at the time so there are no restore points.

Also, the homepage on that user was changed to MSN and won't let me change it. That makes it even more likely to be a Microsoft update issue I suppose.